Indian IT Services May Experience Moderated Growth Of 3-5% In FY24: Icra

The Indian IT services industry is set to navigate a period of tempered growth in the fiscal year 2024 (FY2024), projecting a modest 3-5 per cent increase in revenue denominated in USD, according to credit rating agency Icra.

This anticipated slowdown comes against a backdrop of lingering uncertainties in key markets, leading to the deferral of non-critical projects and a discernible deceleration in discretionary IT spending by pivotal sectors such as banking, financial services, insurance, retail, technology, and communication.

Icra foresees the Indian IT services industry experiencing a more measured expansion in FY2024, with revenue growth estimated between 3-5 per cent. This marks a decline from the robust 9.2 per cent year-on-year growth achieved in FY2023. The uncertainty prevailing in key markets has prompted companies to put the brakes on certain projects, thereby contributing to this moderated growth trajectory.

Despite the growth slowdown, the industry is expected to maintain healthy operating profit margins (OPM). While a decline of 70-100 basis points (bps) is anticipated, OPM is projected to stay within the range of 20-21 per cent in FY2024, said the rating agency.

This dip in margins is attributed to lower operating leverage. Industry players are poised to offset this through strategic cost management measures such as adjusting the onshore-offshore mix, optimising employee pyramid structures, and enhancing employee utilisation rates.

Market Uncertainties Impact Growth Momentum

 The industry's growth momentum has faced a significant dampening effect due to ongoing macroeconomic headwinds in key markets, particularly in the United States and Europe. Icra’s sample set in Q1 FY24 saw revenue growth of around 3.8 per cent year-on-year in USD terms, which was lowest in the past 10 quarters, indicating the industry's vulnerability to these market challenges.

Certain sectors have been disproportionately impacted. The banking, financial services, and insurance (BFSI) sector has experienced a notable decline due to softness in mortgage, investment banking, capital markets, and insurance segments, which can be attributed to prevailing macroeconomic challenges. Additionally, the communication vertical has faced setbacks owing to delays in 5G technology investments and reprioritisation of technology spending by telecom companies.

Order Book, Hiring And Future Prospects

Despite the current slowdown in converting orders to revenue, most companies have managed to maintain robust order books and deal pipelines. The changing dynamics of consumer demand, post-pandemic, have underscored the essential role of technology spend in corporate capital allocation. This trend is expected to bolster growth once macroeconomic uncertainties ease, likely by the end of the fiscal year.

In response to the growth slowdown, IT services companies have scaled back hiring over the past three quarters. Attrition rates have also seen a decrease as demand and supply have found a better equilibrium.

“Icra expects lower hiring by the IT services companies in the near term because of the expected slowdown in growth and also estimates attrition to further decline over the next few quarters before stabilising at the long-term average of 13-15 per cent,” said Deepak Jotwani, Assistant Vice President & Sector Head, Icra.

During Q1 FY24, the leading five IT exporters of India, namely Tata Consultancy Services (TCS), Infosys, HCLTech, Wipro, and Tech Mahindra, collectively recorded a decrease of 21,838 employees in their net headcount.

TCS, a frontrunner in the industry, saw an increase of approximately 500 employees in their headcount, while the other four witnessed a significant reduction.

Infosys, India's second-largest IT services leader, made a substantial reduction in its revenue growth projection for the entire fiscal year to a range of 1-3.5 per cent in constant currency. This adjustment comes in contrast to its previous estimation of 4-7 per cent. "We will assess our hiring objectives based on the prevailing demand landscape and the anticipated course of the remaining year," commented Salil Parekh, Chief Executive and Managing Director of Infosys, during the Q1 FY24 earnings conference.

But prominent global IT giants like Accenture, Capgemini, and Cognizant, which maintain substantial employee bases in India, each documented a decline of more than 5,000 employees in their headcounts for the latest quarter.

Anirudh Jaitly, Chief Strategy Officer at Awign told BW Businessworld that the landscape of workforce dynamics is changing and there is a consistent demand for highly-skilled gig workers, particularly in the IT sector. Companies are now opting to hire gig workers with specialised skills for specific projects rather than hiring full-time employees. 

“Companies are now choosing high-skill gig workers for specific projects instead of hiring full-time employees to avoid talent underutilisation. We expect a significant 45 per cent growth in demand for Q2 (FY24), mainly driven by the IT sector,” Jaitly said.

He further explained that the IT industry is making strategic workforce adjustments to improve financial performance. This includes reallocating internal teams to enhance margins and revenue per employee. 

“This involves reducing budgets for existing roles and hiring experienced tech experts who have worked on various projects. The focus is now more on hiring for specific contracts,” he added.

Despite economic challenges, the Indian IT services industry continues to maintain a net cash surplus position, driven by robust liquidity resulting from strong operating cash flows and conservative capex and working capital requirements. The sector's overall financial health is expected to remain sturdy, supported by solid cash flow generation, low debt levels, and ample liquidity, noted Icra.

(The report was been updated at 10.35 pm IST on 29 August 2023)